WisdomTree Chinese Yuan ETF (CYB)

China's government just can't help itself. The State Council intends to accelerate construction projects and enact other measures in order to expand domestic demand and stabilize growth.

The plan comes amid data which suggests that the economy is softening. However, it also contrasts with noises from China's leadership that it's prepared to tolerate slower growth in order to enact reform that would shift the economy away from heavy industry and towards consumption.

Meanwhile, foreign money entering China plummeted to a five-month low of $21.1B in February from $72.3B in January. The plunge suggests that the government's attempts to discourage speculation on yuan appreciation by forcing the currency to fall may be enjoying initial success. The inflows of hot money can be a problem, as they can inflate asset prices.

The Shanghai Composite is -0.3%, while the USD-CNY is +0.4% at 6.219 yuan.

That's because a sustained fall to under 6.20 could cause losses on billions of dollars of hedging products that Chinese companies have taken out as part of a bet on the renminbi's appreciation.

Strategist Geoff Kendrick estimates that mark-to-market losses on the products top $2B.

The offshore yuan, to which the derivatives are tied, is at 6.1905.

The onshore currency is at 6.1965 after falling to as low as 6.2026, with the movement being the first time the renminbi has deviated more than 1% from the central bank's daily midpoint after it doubled the currency's trading band to 2% from that point over the weekend. The bank set today's midpoint at 6.1351.

Average new home prices in 70 major cities rose 8.2% on year in February after moderating to 9% in January, the WSJ calculates. On a monthly basis, home prices rose in 57 cities vs 62 in January. The weakening of the growth in house prices comes amid Chinese government efforts to cool the sector.

Meanwhile, foreign direct investment in China grew 4.1% on year to $8.6B in February, press calculations show, but growth was down sharply from 16.1% in January.

FDI climbed 10.4% to $19.3B in the first two months of the year, the government said.

The reading comes with the rider, as is the case with other economic data, that the Lunar New Year may well distorted the figures.

The latest data follows China unveiling a long-awaited urbanization plan to move 100M people into cities from rural areas. Farmers will be able to more easily sell or lease their land, find jobs in cities, and receive public services in urban areas.

China's industrial production growth slowed to 8.6% on year in January and February from 9.7% previously and missed consensus of 9.5%.

Retail sales softened to +11.8% from +13.6% and vs +13.5%.

Urban fixed-asset investment +17.9% vs +19.6% and +19.4%.

The disappointing readings add to other data that indicate that China's economic growth is moderating, including plunging exports.

However, Chinese Premier Li Keqiang became the latest member of the government to indicate that the leadership is prepared to accept slower growth. "The GDP growth target (for 2014) is around 7.5%," Li said. "'Around' means there is some flexibility and we have some tolerance."

Li also reiterated the government's increased acceptance of bankruptcy, saying that some loan defaults are "hard to avoid." He added that the government needs to "enhance oversight" and ensure that there's no "systemic and regional risks."

Meanwhile, Chinese cadres will be assessed on a range of metrics, such as the environment and improving people's lives, and not just on economic growth.

Despite the disappointing data, the Shanghai Composite rose 0.95% amid speculation that listed firms will be permitted to offer preferred shares for the first time.

Chinese exports dropped 18.1% on year in February vs growth of 10.6% in January and consensus of +6.8%.

However, the trend may have been distorted by the Lunar New Year holiday and fake invoicing that boosted the data a year earlier, while the severe winter weather in the U.S. may also have had an effect.

Imports +10.1% vs +10% and +8%.

China swung to a trade deficit of $22.98B last month from a surplus of $31.86B in January and vs forecasts of $14.50B.

"We will probably have to wait for next month's data to get a true picture of the export situation, but we shouldn't worry too much," says UBS economist Wang Tao.

As expected, inflation eased to a 13-month low of 2% on year in February from 2.5% in January. The figure is below the government's 2014 target of 3.5%.

On month, CPI +0.5% vs +1% previously and consensus of +0.8%.

PPI declined for the 24th consecutive month, sinking 2% vs -1.6% and -1.9%. "The risk of deflation is rising in the near term," say ANZ economists Liu Li-Gang and Zhou Hao.

The factors that could be dragging on producer prices include weak consumer demand and the excess capacity of some raw material-industries such cement as glass and steel.

As expected, China's corporate-bond market has suffered its first ever domestic default, with Shanghai Chaori Solar Energy Science & Technology failing to fully pay 89.8M yuan ($14.7M) in interest that was due today.

Until now, China had bailed out distressed companies.

Moody's believes that the default will be a "wake-up call" that will help the growth of China's bond market. It will "signal regulators' higher tolerance for corporate bond defaults amid financial market reforms, which is in line with the current central administration's shift to adopt more market-oriented policies," Moody’s says.

Meanwhile, the Shanghai government has reportedly given authorization for a city-owned investment company to purchase non-performing loans from local banks. The approval follows similar approval by other municipalities and indicates how Shanghai is preparing for an expected rise in bad debt.

The markets reacted calmly to Chaori's default and the Shanghai Composite closed -0.1%.

"Whether GDP growth is to the left or to the right of 7.5%, that is not very important. What is important is job creation," Lou added.

The government aims to create 11M jobs this year.

"This flexibility allows them to flag an encouraging number to the business community but at the same time to feel free not to react with stimulus and more debt if it's missed a bit," says Credit Agricole economist Dariusz Kowalczyk.

China has kept its annual growth target at 7.5% for 2014, allaying the concerns of some but disappointing others that it would lower the goal as part of the government's focus on reforming the economy and trying to rein in ballooning credit.

However, in an address to the annual meeting of the National People's Congress, Chinese Premier Li Keqiang reiterated his commitment to reform to make growth more sustainable. China will cut idle factories and encourage private investment, and it has reduced its target for growth in fixed-asset investment to 17.5%, the slowest in 12 years.

As expected, China is continuing to target inflation of 3.5% and a fiscal deficit of 2.1% of GDP.

The government also intends to wage a "war" on pollution, including by reducing capacity in the steel and cement sectors.

Meanwhile, China's HSBC services PMI rose to 51 in February from 50.7 in January. However, composite PMI slipped into contraction territory with a fall to 49.8 from 50.8. In comparison, official non-manufacturing PMI rose to 55 from 53.4. (PR)

China's HSBC manufacturing PMI fell to a seven-month low of 48.5 (flash 48.3) in February from 49.5 in January. (PR)

In contrast, the official non-manufacturing PMI rose to 55 from 53.4.

The figures come after government data showed that manufacturing PMI slipped 50.2 from 50.5.

"We are seeing a higher share of services in GDP, and we cite that sometimes as one of the signs of rebalancing in the economy," says BBVA economist Stephen Schwartz. "If that's part of a longer-term trend, that's somewhat encouraging."

The readings add to other data that paint a mixed picture of the Chinese economy. The latest numbers are also thought to have been affected by the Chinese Lunar New Year, when production tends to slow down.

China's official manufacturing PMI slipped to an eight-month low of 50.2 in February from 50.5 but topped forecasts of 50.1.

The data adds to flash HSBC PMI that showed that Chinese factory activity softened in February. The final HSBC reading is due out on Monday.

Both sets of figures were probably distorted by the Chinese New Year, so the government remains sanguine. "Based on market demand and the production situation in some sectors, we expect that future economic growth will remain generally stable," the government said.

"The slowdown in manufacturing growth is due to a deceleration in investment, especially of credit-sensitive infrastructure and real-estate investment," says RBS economist Louis Kuijs. "But there's no need to become overly concerned - the government has the policy space it needs to ensure its bottom line on growth this year while retaining financial stability." (PR)

Preparing for a wider trading range for the currency, the PBOC engineered the yuan's recent decline in order to shake out speculators, reports the WSJ, citing sources close to the bank. Among the moves made by the central bank are directing state-owned lenders to buy dollars.

Previous to the recent quick decline, the yuan had been on a steady rise - attracting a flood of money into the country trying to benefit from a one-way bet. The PBOC and the country's banks had to mop up $45B of foreign exchange in December, the 5th consecutive month of net purchases. One-way no longer, the yuan has slipped to its lowest level since last summer.

Analysts expect the PBOC to expand the allowed trading range of the yuan to 2% daily, up from 1% now (it was 0.5% in April 2012).

The move to widen the trading band and perhaps weaken the currency comes, of course, as China's economy is slowing down. "I'm more concerned about foreign demand and my customers' ability to pay me these days," says a businessman in Shenzhen.

Meanwhile, Finance Minister Lou Jiwei has played down the fall in the yuan and the risks from the shadow banking sector, while PBOC Governor Zhou Xiaochuan has indicated that the economy can sustain growth of 7-8%

The People's Bank of China has drained $7.9B from the country's financial system by selling 48B yuan in repurchase contracts, the first such transaction since June.

The PBOC made the tightening move after weekend data showed that aggregate financing soared to a record 2.58T yuan ($425B) in January from 1.23T yuan in December despite the bank's attempts to rein in lending.

Meanwhile, foreign-direct investment in China climbed 16.1% to $10.76B in January in an indication of continued confidence in the country's economy despite recent cooling,

Separately, the difference in the reported economic output between the national government and China's 31 provinces fell to 10.7% in 2013 from 11% in 2012. The regions' combined output was 62.9T yuan, topping the national figure by a still substantial 6.06T yuan. "Regional authorities are showing more realistic data," says Credit Agricole's Dariusz Kowalczyk. The figures "may reflect the change in emphasis in the assessment of regional authorities away from growth towards other factors, which reduced the incentive for them to inflate the numbers."

Chinese aggregate financing, the broadest measure of credit, grew to a record 2.58T yuan ($425B) in January from 1.23T yuan in December and topped forecasts of 1.9T yuan.

New local-currency lending soared to 1.32T yuan, the highest level since 2010, from 482.5B yuan in December and vs consensus of 1.1T yuan.

New trust loans, which are receiving much focus due to the risk of defaults, halved to 106.8B yuan from 210.8B yuan a year earlier.

The continued expansion in credit should help the economy keep its momentum, although it contrasts with the People's Bank of China's attempts to rein in the soaring debt and protect the stability of the financial system.

"The PBOC is trying to take the punch bowl away but the banks are continuing to lend and keep the party going," says Société Générale's Guy Stear.

M2, China's widest measure of money supply, +13.2% on year in January, in line, vs +13.6% in December.

WisdomTree Chinese Yuan Fund seeks to achieve total returns reflective of both money market rates in China available to foreign investors and changes in value of the Chinese Yuan relative to the U.S. dollar.
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